How is the banking industry placed to perform in 2025?
Peter Dawkins: 2024 was a remarkable year for banks, which posted strong earnings and balance sheets. Many investors are now wondering if that momentum can carry forward.
Gerard Cassidy: U.S. bank stocks as measured by the S&P Bank Index were up 34%, easily outperforming the S&P 500. What we’re likely to see in 2025 is similar outperformance, for three reasons.
First, the economic outlook is still quite positive in the U.S., and as many investors recognize, banks are products of their economy.
Second, the change in the regulatory outlook under the new administration is significant, and we believe it’s going to be a much softer touch for the banks. Capital requirements for the top 30 banks would have risen by about 16% under the Basel III Endgame proposal, but that was rejected. Under a new proposal, we think the actual capital increase requirement will be zero.
Finally, the higher-for-longer interest rate environment is very positive for the banks. They will be earning profits from their deposits on their balance sheet as low-cost deposits are deployed into higher-yielding assets.
Anke Reingen: The outlook is more muted in Europe, though a 15% increase in European bank share prices year-to-date is much better than we had expected.
We forecast moderate EPS growth in 2025 – higher for banks with less gearing to net interest income, but more fees and trading income. We expect earnings growth to accelerate in 2026 as the economy recovers.
While it’s too late for Europe to adjust the path of the Endgame rules, European and UK regulators are reviewing previous proposals to ensure a level playing field, especially with respect to market risk.
“2024 was a remarkable year for banks – many investors are now wondering if that momentum can carry forward.”
Peter Dawkins, Vice President, European Equity Research
What’s the likely impact of geopolitical volatility, including potential new trade barriers?
Reingen: Uncertainty over the effects of tariffs has impacted the behavior of corporates, for example, in terms of investment. European banks have seen less demand for financing in Europe, but more demand for financing in the U.S. and Asia.
Added to this, there has been considerable uncertainty on the political front in France and Germany. Retail clients’ behavior has largely been unaffected, but corporates have been more hesitant to invest in Europe, and to lend and finance.
“Uncertainty over the effects of tariffs has impacted the behavior of corporates, with European banks seeing less demand for financing in Europe and more demand in the U.S. and Asia.”
Anke Reingen, Global Co-Head of Financials Research and European Banks
What are the prospects for M&A?
Cassidy: In the last four years, the M&A cycle has been quite muted. We expect to see it accelerate in 2025 and 2026 under that expected softer-touch U.S. regulatory regime. We see more consolidation coming among the bigger regional banks.
The regulatory cost of exceeding $100 billion in assets is quite high, and a handful of banks with assets of $50 to $90 billion are going to have tough strategic decisions to make. We believe that over the next two years, dividend increases are coming, and stock buybacks will be increasing for all the large U.S. banks.
“We believe that over the next two years, dividend increases are coming, and stock buybacks will be increasing for all the large U.S. banks.”
Gerard Cassidy, Global Co-Head of Financials Research and Head of US Bank Strategy
What about loan growth potential?
Cassidy: We are quite optimistic that loan growth will start to accelerate as the U.S. economy grows. Our regression analysis shows that bank loan growth is tied to nominal GDP growth: if we’re at 2 to 2.5% real growth, with 3% or higher for inflation, we’re probably going to see 5 to 6% loan growth from corporate and industrial lending.
Reingen: In Europe the direction of travel is somewhat different. Inflation is declining, and given the cautious economic outlook, the expectation is that the ECB will continue to cut rates. The question is how U.S. inflation might impact Europe.
We’re looking for lower rates to stimulate loan growth. For the time being, we can see this on the mortgage side, but on the corporate side loan demand has been really muted.
How about investment banking and private credit fee lines?
Reingen: The outlook for investment banking fees is strong, with the pipeline building. Deregulation in the U.S. should be an additional driver.
Cassidy: Private credit expansion has been incredible over the last two years. But we now anticipate that with the lower risk profile for U.S. banks, they’re going to go on the offense. Private credit will still have its place, but we’ll see the banks be more competitive.
What events might upset these predictions?
Cassidy: The number one risk for our positive, bullish outlook for bank stocks is the reemergence of inflation. A monetary policy shift from to tightening to from easing would drive short-term rates higher and likely lead to an economic slowdown and higher credit losses.
